By A.L. “Bud” Johnson.
Reprinted by permission of the author and the High Plains Reader
Recent news stories express concern over rising oil and gasoline prices and their possible adverse effect on the recovering US economy. Consequently, it might be useful to review the causes for rising prices, as well as to cite some significant benefits to North Dakota and the U.S. economy.
The following talking points, numbers one through seven, address the causes of higher prices; numbers eight through ten point out some significant benefits to North Dakota and the nation, if current policies were changed.
Wall Street Speculators and High Gas Prices
Speculators are the primary cause of high gasoline prices in the U.S. The bailed-out NYC banks, as well as large Wall Street hedge funds, are major players in this scheme. These latter, Hedge Fund managers, are speculators who employ computer-driven “buy and sell programs” for short- and long-term trades that lock in a profit.
Often the trades involve West Texas Intermediate (WTI) – a grade of crude oil used as a benchmark in oil pricing, and Brent North Sea Oil (another standard benchmark for pricing oil, referring to a blend of oils from fields in the northern North Sea), exploiting the price differentials between the two.
- The Koch Brothers invented such index price swaps with Chase Bank in 1986. Then J.P. Morgan, Morgan- Stanley, Citicorp, Bank of America, and Goldman-Sachs, along with several big hedge funds, joined up. The Koch Brothers also lobbied hard and long to repeal the Glass-Steagall Act with help from Senator Phil Gramm [R-Texas] (See the book Reckless, by former U.S. Senator Byron Dorgan [D-ND]).
- In 2008, Commissioner Bart Chilton of the Commodities Futures Trade Commission (CFTC) blamed rampant speculative trading by the Koch Brothers and their big-bank allies for $4 gasoline prices at the pump and $140-per-barrel oil. The CFTC is an independent agency of the U.S. Government that regulates the futures and options markets.
- The McClatchy Press had reported that prior to 1999, and the repeal of Glass-Steagall, Wall Street speculators made only 30% of trades in oil futures. However, by 2011 they were making 68% of these trades while legitimate end-users—the folks who actually produce and deliver the oil, like oil refiners—made 26%, and other transportation consumers, just 6%.
- The Wall Street Journal reported in December 2011 that the volume of financial contracts traded on any given day is 35 times greater than the amount of oil produced. OPEC (the Organization of Petroleum Exporting Countries) has been correct all along in blaming speculation for high oil prices.
- In August 2011, Rex Tillerson, CEO of Exxon-Mobil, said supply and demand fundamentals suggest oil prices should be only $65 to $70 per barrel, instead of the much higher rates currently in place.
- The price of crude oil normally accounts for little more than 50% of the price of gasoline, with taxes, refining and transportation making up the rest. In January 2012, crude oil prices accounted for 76% of the price of gasoline, according to statistics provided by the U.S. Energy Information Administration of the Department of Energy (DOE/EIA).
- The United States imports about 12 million barrels of oil per day (BOPD) at current $100-per-barrel prices, costing $1.2 billion per day, and unnecessarily exacerbating the U.S. trade deficit.
- Rising North Dakota Bakken oil shale production could reduce imports by two to three million barrels per day by 2020 and greatly reduce the U.S. trade deficit.
- North Dakota oil tax revenue is pouring into State coffers at an unprecedented rate. Since 1998, the value of the North Dakota oil trust fund has quadrupled, and then doubled in the last 5 years. During the 2009- 2011 biennium it grew by $920 million. The North Dakota Legacy Fund, less than 1 year old, had $177 million by February, 2012, and was growing at the rate of $40 million per month. It should reach $10 billion in the biennium ending 2011-2013. The North Dakota School Land Trust Fund has $1.7 billion from oil and gas leases.
- Nevertheless, oil royalty revenues for North Dakota are only about half of what they could and really should be. This State currently only gets 11.5% from its production and extraction taxes. On school lands in North Dakota, the State gets 18.5%. Royalty payments in Louisiana, however, are as high as 33%.
Development of the estimated 400 billion barrels of oil per day (BOIP) will take thousands of wells. Continental Resources CEO, Harold G. Hamm, estimates a 7% recovery, or about 30 billion barrels of recoverable oil plus abundant associated gas.
It will take 28,000 more wells to fill all the empty well-spacing units covering the Bakken complex. Assuming 10,000 active, producing wells in 2015 (vs. the present 6000+), averaging only 100 barrels oil per well, per day, production of one million barrels per day [BOPD] is a reasonable estimate.
This would generate annual tax revenue for North Dakota of about $2.3 billion at a low average price of $55 per barrel.
As for J.P. Morgan Chase, the largest bank in the United States, they recently reported a $2 Billion loss by “hedging” with Credit Default Sweeps (CDS’s).
The Dodd-Frank Law, passed by Congress in 2010, has language that limits such activity.
If a bank makes a commercial loan and insures it against a default, THAT is legal, and called a “hedge.”
On the other hand, if a bank with FDIC insured deposits buys oil, gas, or other commodities, and is not a legitimate end user, like an oil company, THAT is a bet, increasing risk, and THAT is illegal. Unfortunately, there is no enforcement of the law against such activity at the present time.
Wall Street Banks, and many Republicans, oppose enacting the “Volker Rule,” which would end such illegal speculation and benefit American society with lower gasoline prices.
[Editor’s note: Bud Johnson is a resident of Mandan, N.D., and an oil and gas consultant. His career includes ten years with Shell Oil E & P (Exploration and Production) and 22 years as a CIA international oil and gas analyst.]